Banc of California, Inc. (BANC) Q4 2020 Earnings Report, Transcript and Summary

Hello and welcome to the Banc of California’s Fourth Quarter Earnings Conference Call. [Operator Instructions] Today’s call is being recorded and a copy of the recording will be available later today on the company’s Investor Relations website. Today’s presentation will also include non-GAAP measures. The reconciliation for these and additional required information is available in the earnings press release. The referenced presentation is available on the company’s Investor Relations website. Before we begin, we would like to direct everyone to the company’s Safe Harbor statement on forward-looking statements included in both the earnings release and the earnings presentation. I would like to now turn the conference call over to Mr. Jared Wolff, Banc of California’s President and Chief Executive Officer. Please go ahead.

Good morning and welcome to Banc of California’s fourth quarter earnings call. Joining me on today’s call is Lynn Hopkins, our Chief Financial Officer, who will talk in more detail about our quarterly results. We ended 2020 with an exceptional quarter, one that demonstrates the potential of the franchise that we are building. We continue to execute well on all the key initiatives that have led to our improved financial performance in recent quarters. And in the fourth quarter, we were able to add in the loan and earning asset growth that enhanced our profitability. As a result, we finished the year with a return on average assets north of 1.1% for the fourth quarter. On our last couple of earnings calls, we indicated that we expected to end the year with a larger balance sheet than the first half of the year to drive greater profitability. Our fourth quarter results reflected these efforts as we realized strong operating leverage and a significant increase in our pre-tax pre-provision income, net income and earnings per share. Looking back on 2020, we are proud that we delivered on the key objectives that we laid out for the year. We dramatically improved our deposit mix and reduced our cost of deposit. We maintained good stability in our net interest margin despite the dramatic decline in interest rates. We reduced expenses and increased our operating leverage. We shifted our loan portfolio more towards business related relationship loans. We ramped up commercial loan production in the second half of the year to replace the runoff of the single-family loan portfolio and finished the year with a balance sheet that was just about even with the end of the prior year. We managed credit quality and improved our overall credit quality ratios despite the pandemic nonetheless while still building up reserves. And we had several large wins that will accelerate our earnings growth going forward, including exiting the LAFC contract in a way that eliminates future payments, issuing sub-debt at attractive pricing, setting the table for preferred redemption that we hope to complete this year, restructuring expensive FHLB long-term borrowings and obtaining sizable legal and insurance recoveries on old matters that contributed meaningfully to tangible book value. The result of these accomplishments is that we made significantly more money on a core basis in 2020 than we did in 2019 while operating with a smaller balance sheet for most of the year. And we are able to do it while dealing with the challenges presented by the COVID-19 pandemic and operating in a low rate low growth environment. We closely evaluate our performance relative to other community and regional banks. And in many of these key areas, most notably reducing deposit costs, holding our loan yields and improving our net interest margin. As laid out in our investor presentation, our relative performance since the beginning of 2018 has been among the best in the entire country. These results speak to our ability to execute on the strategies we have put in place to enhance the value of our franchise. We are consistently adding new commercial banking relationships with clients who are choosing Banc of California, because they value our level of service and execution, not necessarily based on our pricing of loans and deposits. Our ability to effectively identify and cultivate these types of customer relationships and the value proposition we can offer them has been critical to our success in adding low cost transaction deposits and originating loans with attractive risk adjusted yields that support our net interest margin. We have also continued to optimize our operations to reduce expenses and enhance efficiencies, with investment in technology to improve and provide exceptional banking experiences for our customers. In a year when the ability to serve clients digitally became even more critical to the financial services industry, we were able to leverage our technology platform effectively to not only drive increased efficiencies, but also to deliver more convenience and superior service to our customers at critical moments, like the rollout of the PPP program. It was a year of incredible progress. And I want to extend my gratitude to our entire organization for their dedication and hard work. I believe that together we have truly made Banc of California, the go-to relationship focused business bank in Southern California. And the positive reputation we have built is yielding more referrals everyday and giving us more opportunities to add the type of high-quality deposit lending relationships that will further enhance our growth and profitability in the future. Specific to our fourth quarter performance, we generated net income available to common shareholders of $17.7 million or $0.35 per diluted share and $29.6 million in pre-tax pre-provision income. As I mentioned, one of the initiatives we had in 2020 was pursuing insurance recoveries for historical legal matters, where we might not have received sufficient reimbursement from the insurance company, where we determined we should have seen a recovery through litigation. We successfully recovered approximately $2.8 million in the fourth quarter, which added to our earnings and growth in tangible book value during the quarter. We continue to work on behalf of shareholders to pursue recoveries and other matters though the timing and resolution of such matters, of course, remains uncertain. Excluding these recoveries, we still had significant growth in earnings, which was driven by a number of factors. Most notably, we continued to drive down our funding costs with our total cost of deposits declining 15 basis points to 36 basis points for the fourth quarter and ending the year with a spot rate of 29 basis points. The lower deposit cost was primarily driven by the continued improvement in our deposit mix. We are sixth consecutive quarter of DDA growth with strong inflows coming from both our traditional banking groups and our specialty deposit areas. The growth in DDA enabled us to reduce our balances of higher costs, time deposits and other wholesale funding. The reduction in deposit costs combined with good stability in our earning asset yields helped drive a 29 basis point increase in our net interest margin to 3.38%. We continue to maintain good expense control and our core expenses decreased 9% from the same quarter a year ago. And we saw positive trends across our asset quality metrics, with a 45% reduction in our non-performing loans to $36.6 million and a 29% decrease in loan deferrals to $202 million as our credit team has been very successful in resolving problem loans at a pace that exceeds the amount of inflow. During the quarter, we resolved two of our largest non-performing loans with no additional reserves required for either of them. Given the positive trends in asset quality and the substantial allowance that we have built, we had just a small provision requirement in the fourth quarter. As I mentioned earlier, the most significant difference in our fourth quarter performance relative to earlier in 2020 was our level of earning asset growth. We added $773 million of newly originated loans in the fourth quarter, which was up 39% from the third quarter and which resulted in net loan growth of $220 million as we are still seeing considerable run-off in certain legacy areas of the portfolio. Loan production is coming from both new relationships to the bank as well as from expansion of existing relationships. Due to the good production we have in the fourth quarter in our targeted areas, loans to commercial customers increased to 79% of our total loans, up from 78% at the end of the prior quarter and 72% at the end of 2019. While many borrowers remain cautious and the environment is extremely competitive, we are still seeing good, high-quality opportunities throughout our markets. And our banking teams are doing an outstanding job of filling our pipeline in closing relationship loans. The pipeline remains healthy as we begin the new year and the volume of opportunities that our bankers are generating allows us to select credits with attractive risk adjusted yields and achieve the type of profitable growth that we are targeting. As a result of our pricing discipline, we are able to maintain good stability in our average loan yield throughout 2020, which ultimately helps to support significant increase we saw in our net interest margin at the end of the year. Overall, we are pleased that despite a difficult environment, where we were able to deliver on our key objectives for 2020 and deliver strong profitability that we will continue to build upon in 2021. Now, I will hand it over to Lynn, who will provide more color on our operational performance and then I will have some closing remarks before opening up the line for questions. Lynn?

Thanks, Jared. First, as mentioned, please refer to our investor deck which can be found on our Investor Relations website as I review our fourth quarter performance. I will start by reviewing some of the highlights of our income statement before moving on to our balance sheet trends. Unless otherwise indicated, all prior period comparisons are with the third quarter of 2020. Net income available to common stockholders for the fourth quarter was $17.7 million or $0.35 per diluted share. Our adjusted pre-tax pre-provision income was $24.5 million, an increase of $5.6 million from the prior quarter, which resulted in a return on average assets of 1.11% and an adjusted return on average assets of 92 basis points. Total revenue increased $8.7 million or 14.6% compared to the prior quarter as net interest income increased by $5.7 million and non-interest income rose by $3 million. The net interest income growth reflected the ongoing benefit from lower funding costs, combined with the impact of a larger balance sheet. The increase in non-interest income stems mainly from higher settlements in insurance recoveries on past legal matters. We achieved a net interest margin of 3.38%, up 29 basis points from the prior quarter due to both an increase in our overall earning asset yield and a decline in our cost of funds. Our cost of funds declined by 12 basis points to 70 basis points despite having 2 months of carrying costs associated with our $85 million subordinated debt issuance. Our earning asset yield increased 18 basis points due to the combination of a higher total loan yield and an improved mix of interest earning assets as we deployed excess liquidity into higher yielding loans. The average yield on loans increased 12 basis points to 4.58% during the fourth quarter due to higher average commercial and industrial loans and higher prepayment fees from refinancing activity and accelerated accretion from PPP loan forgiveness. As Jared highlighted, our average total cost of deposits fell 15 basis points to 36 basis points for the fourth quarter as we successfully lowered our cost of interest bearing deposits by 19 basis points and increased our average non-interest bearing deposits by $91 million. We ended the year with a spot rate of 29 basis points for our all-in cost of deposits. Looking ahead, we expect our funding costs to continue to trend lower in 2021 albeit not as much as in 2020. With that said, we have a few larger money market accounts and time deposits that should move down our cost of deposits once they reach the end of their agreed terms. Over the next 6 months, we have $324 million of CDs and FHLB advances scheduled to mature with a weighted average cost of 1.3%, which should further reduce our cost of funds. With our cost of funds likely to continue declining and our balance sheet might lead to attain modest growth, we see the potential for further net interest margin expansion over the course of 2021 excluding the impact of PPP related income. Non-interest income increased $3 million to $7 million, while customer service fees increased by $455,000 and processing fees for credit facilities increased by nearly $300,000. The biggest driver of our non-interest income growth in the quarter was higher settlements and insurance recoveries of $2.4 million from several historical legal matters. The opportunities and timing of recovering such monies are not predictable, but we will continue to strategically pursue them. We continue to drive operating efficiencies as adjusted expenses of $44 million for the fourth quarter declined to 9% from the same quarter last year. Our adjusted expenses increased $3.4 million or 8% from the prior quarter due mostly to higher incentive compensation related to our balance sheet growth and profitability. The effective tax rate for the fourth quarter was 24% compared to 13% for the third quarter and the effective tax rate for all of 2020 is approximately 12.5%. Turning to our balance sheet our total assets increased by $139.2 million in the fourth quarter to $7.9 billion. We deployed a portion of our excess liquidity into high-quality commercial loans and we continue to replace high cost deposits and brokered CDs with core deposits in the quarter. As we selectively add high-quality earning assets in the future both in terms of loans and investment securities, we continue to have flexibility to add overnight and other wholesale funding if needed to strategically support our earning asset growth. Our gross loans held for investments increased by $220 million or 3.9% during the fourth quarter as growth in C&I loans more than offset lower multifamily, CREs, and SBA balances. The C&I loan growth of $501 million in the quarter was primarily due to growth in mortgage warehouse lines. The $47 million decline in SBA loans in the quarter was primarily due to PPP loan forgiveness. As of year-end, about 39% of our PPP loan count representing about 56% of our remaining PPP loan dollars when the forgiveness process, we are actively working with our clients to help them through the forgiveness process and using the opportunity to deepen relationships and identify additional lending opportunities. In addition, we have already started participating in Round 2 for PPP loans to support our existing and prospective clients. Deposits were relatively flat at $6.1 billion at year end, but our mix and cost continue to improve, thanks to our focused initiatives. Our activity in the quarter included a $64 million decrease in brokered CDs and a $65 million decline in non-brokered CDs. These decreases were substantially offset by a $63 million increase in low cost checking and growth of $109 million in non-interest bearing deposits. Non-interest bearing deposits represented 26% of our total deposits at quarter end, up from 24% at the end of last quarter. Demand deposits, non-interest bearing, low cost checking increased by 5% from the prior quarter, representing our sixth consecutive quarter of demand deposit growth, a goal we remain very focused on to drive franchise value. Over the past year, demand deposits increased to 60% of total deposits, up from 48%, reflecting the significant improvement we have made in our deposit base. This increase combined with the lower interest rate environment and our proactive efforts to reduce deposit costs can bring in new relationships drove our all-in average cost of deposits down from 127 basis points from a year ago to 36 basis points achieved in the fourth quarter. Our securities portfolio was substantially unchanged at $1.2 billion. However, $16 million of CLOs were called and for the third consecutive quarter tighter credit spreads reduced the unrealized loss in our CLO portfolio to $9.7 million. The improvement of CLO pricing at this quarter added $0.11 to our tangible book value per share relative to the prior quarter. Our entire securities portfolio ended the quarter with a net unrealized gain of $11 million. One of the highlights from the fourth quarter was our strong credit quality performance. We resolved a couple of our largest NPAs during the quarter leading to the 45% reduction in our non-performing loan balance. Our loan deferral numbers also declined by $81 million to 3% of total loans held for investment, down from 5% at the end of the third quarter. Delinquent loans decreased $51.4 million in the fourth quarter to $31.6 million or 0.54% of total loans. Non-performing loans decreased $30.3 million to $36.6 million as of year end. However, $17.7 million or 48% of this balance represented loans that are in current payment status that are classified non-performing for other reasons. The $30.3 million decrease is a net number and included $35.8 million of loans resolved since the end of the last quarter offset by $5.5 million of new non-accrual loans. Let me turn to our provision for the quarter. As we have discussed in the past, our ACL methodology uses a nationally recognized third-party model that includes many assumptions based on our historical and peer loss data, our current loan portfolio and economic forecast. We saw less volatility in economic forecast during the second half of the year, which results in a lower impact on our allowance for credit losses. This combined with the improved asset quality metrics resulted in a fourth quarter provision for credit losses of just $1 million. Following the provision expense recorded in the fourth quarter, our total allowance for credit losses totaled at $84.2 million, which represents an allowance to total loans coverage ratio of 1.43% or down 23 basis points from the third quarter. This decline reflects a number of factors, including our improved asset quality metrics, the charge-off of this specifically that are related to our largest non-performing loan that was resolved in the quarter, the mix of our loans as much of our growth in the quarter occurred in our mortgage warehouse portfolio where historical loss experience was extremely low, and our view on how the current economic forecasts will impact our specific portfolio. Excluding our PPP loans, the ACL coverage ratio stood at 1.48% at December 31, while the allowance of total non-performing loans coverage ratio also remained healthy at 230%. Our capital position remains strong, with a common equity Tier 1 ratio of 11.19% and has benefited from the strategic actions completed over the past several quarters. We will continue to be prudent and strategic with the use of our capital to maximize benefits to shareholders and to build franchise value, while protecting our variable capitalized position at a time when the outlook although improving still remains uncertain. The successful subordinated debt raise of $85 million in the fourth quarter further positions the company to move forward on capital actions during 2021 subject to regulatory approval that are expected to be accretive to earnings. At this time, I will turn the presentation back over to Jared. Jared?

Thank you, Lynn. As we begin 2021, we are still facing an uncertain environment. Our Southern California markets are still significantly impacted by COVID restrictions although we haven’t seen an impact on our credit quality or a new wave of default requests. And as our fourth quarter performance demonstrates, while we remain cautious around credit, there are still good lending opportunities available. The rollout of the vaccine is certainly positive news, but it’s hard to predict the timing of when the operating environment will begin to normalize. So we will continue to operate in an appropriately conservative manner maintaining high levels of capital, liquidity and reserves and the same characteristics of our loan portfolio that enabled us to maintain strong credit quality throughout 2020 remain in place and should enable us to be very well-positioned from a defensive standpoint. Our goals and priorities for 2021 are similar to the goals we set and achieved in 2020. We expect to continue realizing positive operating leverage as we grow the balance sheet. We maintained a 1% plus return on average assets we achieved in the fourth quarter. We have to continue to enhance our funding base and grow the balance sheet to a size that matches our expense base. We expect to largely complete those goals during the first half of the year, which will put us on the sustainable path to consistently higher returns beginning in the second half of the year subject of course to the operating environment and economic landscape. We feel the organization is at the right size now and we don’t need to make meaningful investments to drive near-term growth. We believe that we can generate balance sheet growth while keeping expenses flat to modestly higher this year. There is quite a bit of capacity to grow with our existing banking team as the talent we have added over the past couple of quarters continues to build their books of business. We still have opportunities to lower our deposit costs, although not to the same degree as we did in 2020. The biggest opportunities in 2021 are centered around some larger time deposits that mature during the year. As these deposits re-priced or runoff, we will see further declines in our deposit costs. We will continue to leverage technology to both increase efficiencies and enhance business development. And as Lynn mentioned, we will look to take capital actions to optimize our capital in ways that will be accretive to earnings. Now that we have added the sub-debt, we have started working on these actions and expect to make progress as we move through the year. These are our goals and priorities for 2021. The progress on these goals won’t be linear. Historically, the first quarter isn’t as strong as the fourth quarter due to seasonal expenses that have a greater impact early in the year. In some quarters this year, we might have progress on one or two goals, while others we might make progress on all of them. But over the course of the year, we believe we can achieve all of our goals just as we did in 2020, which would result in a strong year of earnings growth and value creation for our shareholders. While I used the term profitable growth earlier, it’s important to understand that our emphasis is really more on the profitable than the growth. We aren’t interested in growing for growth sake. We are focused on growing in a way that benefits the franchise over the long-term. Our growth is being driven by adding full commercial banking relationships that generate attractive risk-adjusted credits, not transactional loans. This is the approach we have had since I joined the bank. It requires patience and discipline, but we believe this is the best way to truly enhance franchise value. And we will work hard to make 2021 another rewarding year for Banc of California shareholders. Thank you for listening today. I hope that you and your families are safe and healthy and I look forward to sharing more about Banc of California’s progress in the coming quarters. With that, operator, let’s go ahead now and open up the line for questions.

Thank you. [Operator Instructions] And our first question comes from Timur Braziler of Wells Fargo. Please go ahead.

Hi, good morning everybody.

Good morning, Timur.

Good morning.

Maybe just starting on the balance sheet growth and looking at the loan growth this quarter certainly pretty impressive, especially compared to some of the comments in the transitioning over the past couple of quarters. I guess what drove that magnitude of the growth? I know it’s coming from the warehouse business, but is that taking on new warehouse clients? Is this from increased utilization and is there something that’s more one-time in nature that it all appeared in the fourth quarter or is some semblance of this sustainable into ‘21?

Well, yes, we are certainly gratified by our loan production in the fourth quarter. It was distributed though. Warehouse was the bulk of it and it came from new relationships that we brought on. And as you know, we focus on mid and lower size mortgage brokers and not the huge guys, although we have some of those relationships as well. And we expect warehouse lending in terms of those balances to remain relatively flat for the year. So there is a lot of volume in terms of moving in and out, but we think the level at which we are at is about right. But we also had $230 million of growth than in other areas. And when you compare that to our overall loan portfolio, it was 3.8% on a quarterly basis, but it was about 15% annualized. And then if you look at our – that $230 million across our loan portfolio, excluding warehouse, it was closer to 5% or 4.7% or 18% annualized. So, I think we had a good distribution of loans. We had good inflow of C&I. As we look at this quarter, we are starting to see pretty good inflow of CRE on the bridge side right now. All of our teams are working really hard. And obviously, we have the PPP that’s in process right now. Early indications are that we are going to try to be somewhere where we were last time. We have about 500 – almost 500 inquiries right now that are little north of $100 million. Loan sizes are a little bit smaller. But there is obviously the $2 million max in the program this year for the second round.

Okay, that’s helpful. Thank you. Maybe switching over to margins, I know when you had mentioned that prepayment speeds helped and also higher in-quarter PPP fees. Can you specify the linked quarter increase in prepayment speeds and then the absolute dollars of PPP fees for the fourth quarter?

Sure, Timur. I think I would start out by saying that each of the quarters has had some prepayment activity and PPP fees in them. And when I look at the trends quarter-over-quarter, I think we have done a really great job of keeping our loan margins relatively steady for the linked quarters based on our production. So, appreciate that there is a little bit of these additional revenue items, but the core I am going to say low yield is hanging in there about flat quarter-over-quarter. With respect to our PPP fees itself, I think it was just around $2 million. So, I was trying to put my hands on my notes for the around $2 million, $2.5 million for our PPP fees in the fourth quarter. And you know, the PPP fees, we have an estimated life of about a year. So, we expect the majority of those to wrap up during the first quarter, especially as we launch into the second round of PPP.

Okay. You have the remaining – I am sorry, go ahead.

No, go ahead.

Yes, the remaining amount.

Yes.

Yes. So from the first round, with the fees that we had reported, there is about approximately $2 million.

Sorry, Jared, go ahead.

No, I was just going to say in terms of loan yields. As I look across our portfolio, it slipped a little bit, but it held up pretty well certainly relative to an environment that the biggest stressors are really coming from the C&I side. I mean, this is highly, highly competitive right now. And we are doing everything we can to find the right loans that are giving us the appropriate risk adjusted return for the service that we provide and our teams are doing a fantastic job of doing it. We are not – we are trying to elevate every opportunity to a conversation and not take it out on price alone so that we can figure out what could be done. But at some point, there is a line we are going to draw. And I would say in terms of looking at where loan yields are going there. While there is some optimism out there that loan pricing is going to start rising given where the tenure is going, it’s still pretty competitive. Good news is that our obviously our deposit changes have outpaced the changes on our loan yields and also our loan yields have declined much, much slower than the market generally. So, we are holding it pretty well.

Yes, it’s pretty impressive to have flat C&I yields at the level you guys have in that. But I will step away for now and let other people ask. Thank you.

Thank you, Timur.

Thank you.

The next question comes from Matthew Clark of Piper Sandler. Please go ahead.

Hey, good morning, Jared and Lynn.

Good morning, Matthew.

Good morning.

Good morning. Your guidance on expenses being flat to up modestly this year, just want to make sure we are using the right pace in 2020. Is that about $170 million, $171 million in 2020?

On an adjusted basis, yes. No, I think as I step back and look at it 2020, we got out of the LAFC agreement. So, we had elevated costs early in the year. And then I think our expense base normalized as I look at the fourth quarter, I would expect our run-rate to normalize down a little bit. We had a little bit more in the fourth quarter with the growth in the balance sheet and some year end accruals that we have cited in the release.

Okay, so flat to down off the fourth quarter then, is the expectation?

Yes.

Okay. And then just on the remaining deferrals that are left, can you just remind us what the maturities or expiration schedule looks like there?

Yes, we have a page in the deck on deferrals and I might need to get you the detail afterwards.

Well, if it’s in there, I can find it.

Yes, take a look at the deck and then if you have any questions – we don’t have a chart that lays out kind of what month the deferrals went on. We have a couple of loans in third default right now, but this is the last deferrals that we are doing and it’s dwindling down. We also have the single family in there, which is a little bit longer. And so but it’s definitely coming down. And as we have talked about before, it’s serviced by a third-party DMI. So, in terms of the stuff that we serve is it’s coming down pretty dramatically. The single family stuff is running off at a more measured pace. But we are not giving out anymore deferrals for the stuff that we service.

Okay, great. And then, Lynn, just to follow-up on the prepayment penalty income, can you just maybe quantify on a $1 basis, if you have it, what that was this quarter versus last?

From a dollar per se – don’t have the dollars per se, I would just say that with the refinance activity, we have some refinancing of the – some decreases at the end of the fourth quarter that we had in the third quarter as well. So, I think generally speaking, there is some portion, I think in everyone’s loan yields that have the prepayment, it’s just the pricing of our loans. So, I don’t think we separate it out for just that. It’s part of the loan pricing structure. So, you have given up maybe some portion of the yields or you have added it in order to get the prepayment. So, it doesn’t really create any variance from quarter to quarter.

Okay. Okay, thank you.

Thanks, Matthew.

The one comment I would add, Matthew, is when we talk about our credit quality and our NPAs came down and we were able to resolve a couple of our large NPLs. One of them was a single family residential loan and the process of placing it back on accrual status, we were able to recognize some additional interest income this quarter and I put that around $0.5 million. So that did add a few basis points to our net interest margin. It’s just kind of above and beyond it as we resolve our non-performing assets I wouldn’t expect us to get necessarily those costs.

Yes, we think that we can expand the margin, it’s going to be tempered, I mean, it’s not going to obviously, we don’t have – we have a lot of levers to pull, but I don’t know that they are going to be as dramatic as we were able to accomplish earlier, but we still believe that we have some room to go. And we feel like we are operating in a fairly normal way right now a lot of the heavy lifting. We are going to start reaping the benefits of it. And we are going to keep growing the balance sheet.

The next question comes from Gary Tenner of D.A. Davidson. Please go ahead.

Thanks. Good morning, guys.

Hi, Gary.

Just wanted to revisit the loan growth a little bit of as you have talked about really solid back half of the year, a lot of that driven by mortgage warehouse, but as you talk about the non-mortgage warehouse growth in the quarter, little over $200 million. I mean, if you were to keep balances or mortgage warehouse bounces flat from here as you suggest and grow that pace, I would suggest somewhere in the at least low to mid-teens kind of loan growth year-over-year, do you think that that’s possible in 2021 given what you have put in place over the past year on the commercial side?

I don’t know that I would look that high. I think the environment is such that we are going to be careful. And I think that, that amount of look, when we are starting with a really low base, it’s easy to grow at a higher rate. But overall, I think we are just going to be put on good loans. We do have runoff. And so while production might be a good number, the actual net growth probably won’t be as high as you just indicated because of the runoff. And so we are doing things to hold the run off to make sure that our production actually results in growth, but we do have a single family portfolio that’s running off. We got some multi-families obviously highly competitive. And so really proud of what our teams are doing to kind of fill the bucket and keep it at a good level and not have a hole in the bottom kind of draining it. So we are trying to keep the bucket reasonably full, but it’s not going to be as high as that would implicate.

Okay. I wouldn’t have thought growth would be quite at that level, I just want to get a better sense of where you were thinking about it.

Based on what we are seeing right now just a little bit more color, if it’s helpful, I mean, we’ve got some, we have a lot of great opportunities in warehouse and I will say that our team is exceptional. It’s a – we are trying to be proactive for the opportunities that present themselves that are appropriately risk adjusted. So one quarter it might be like, you know what, warehouse is looking really good right now, let’s take advantage of the market and make sure that we bring that in and hold those balances, because it’s the right place and we are fortunate that we have such a high quality team in that. In other quarters, we are going to – it’s going to be god, bridge lending is really working well right now, yes and C&I is just looking too inexpensive. In other quarters, C&I is just looking strong, we have a lot of stuff. So we are trying to balance it and we have – we are pulling the right levers, it’s not that we are going to build it all around one division or one type of loan, we won’t have a balanced balance sheet that shows good C&I, good real estate and mortgage is just one of those areas that we have the flexibility to play in. If there were loans – if there were loans that we thought were attractive to buy that were single-family, that were loans that we would have made on our own that have the right risk-adjusted yields that are in the non-QM space. We probably would do that. There are a couple of things that we can do if we thought we could through the types of loans that we would do and it was just to kind of support the runoff and try to keep it flat, because at the end of the day, the growth really needs to come from relationships where we get deposits and that’s what’s going to create the value going forward, but we are trying to be smart about it. So, growth is going to be probably tempered, but it’s going to be sufficient to achieve our profitability objectives.

Okay. Thanks for that, Jared. And then just to revisit the question on kind of the expense outlook, Lynn, I think you said kind of fourth quarter $39 million or so would be the right number, but that included like $4 million recovery or so in terms of professional fees or legal fees and there was some higher cost expense as well, so what was the balance in there?

Sure. I think it’s helpful to look all the way to the very end of the release where we go ahead and adjust out the indemnified legal costs that we have been tracking period over period and to take out our alternative energy, partnership investments the gain and loss and the timing difference there as well. So, when you look quarter-to-quarter, we were up about $3.4 million and as I said a portion of it was in compensation. As we turn the page to 2021 expect few increases in some categories that continue to achieve some other efficiencies that we have identified. So, if you look at the whole year adjusted for no longer being in the LAFC contract, I think it gets you back down to I think the $170 million number that was mentioned earlier is I think a reasonable expectation on how we are running things.

Okay, thank you for that. And then Jared, just give me your comments regarding capital and that you have already started to put things into action I think is what you said on the capital front. Assuming regulatory approval, should we be thinking about the March 15 redemption date for at least part of the preferred or you think it is beyond that?

I prefer not to comment on that just because we are, I think what we’ve said is that we are moving on that. There is a couple things that have to happen. We are optimistic we can get it done, but it’s going to – it’s one of those things that’s going to happen when it happens. And I wish we could predict when, but just out of respect for the process, I think we are just going to let people know when we have approval as opposed to predicting when it’s going to be here.

Okay, fair enough. Thank you.

Thank you.

The next question comes from David Feaster of Raymond James. Please go ahead.

Hey, good morning, everybody.

Good morning, David.

Good morning.

I just wanted to talk on the payoffs and pay-downs, especially in the multifamily side, it sounds like things are pretty competitive there, just curious how much of that’s strategic or is this truly just a competitive issue? And it’s rates in terms of just getting kind of thin and just maybe some commentary on the competitive landscape for loans more broadly?

Sure. So, the multifamily refinancing space is highly competitive right now. We do our best to save the relationships when we learn that they are being sharp who try to get out ahead of it of course, but it’s sometimes hard to do that, because what you don’t want to do is take your existing loans and re-price them downward when they weren’t even thinking about moving. A lot of our loans have prepays on them. But the environment is so competitive that they can absorb the prepay with lower rates depending on when they last financed and so that that’s how competitive it is. So, we have – I think our 5-year, many firms are somewhere in the middle of the pack and we monitor our competition very closely and try to stay there. But at some point, the question is, what are alternative uses for our – for loans and is it too cheap, because we could just deploy money everywhere. When you are sitting close to 100% loan to deposit, you obviously need to be careful where you are putting your money. If we were down at 80% loan to deposit, we would be putting money wherever it could that it made sense to keep the balance sheet at the right level. So look, we are trying to save them if it’s not strategic. There is nothing strategic about having loans go out right now on the multifamily side other than it’s just too – the rates are too low.

Okay. Yes, that makes sense. And that’s what I thought, but I just wanted to check. And then look the deposit growth that you guys have been able to post is phenomenal and that the pace of the remap, the remix of the deposit is really impressive and it sounds like that it’s based on the strategy, I mean, you have got accelerating loan growth compared to I think a lot of peers. Do you think you can keep deposit the pace of deposit growth in line with the loan growth? And are you comfortable operating here kind of in the upper 90s loan to deposit ratio or potentially go back north of that, just curious your thoughts on deposits and funding growth going forward?

So, there is a massive amount of liquidity in the market. And you monitored more banks than I do, but it seems like most banks are benefiting from the environment. And there is a lot of liquidity. So we are a beneficiary of that although we are obviously looking to remix and one of the ways that we have done it is by very focused efforts around who we want to bank on the deposit side. So, we have a terrific specialty deposits team that sits within our private bank that goes after very large relationships. We just brought on a team for property management HOA. We have been active in the fiduciary and bankruptcy trustee area and our teams are and looking at larger deposit clients that need specialty services, they need to know – they need banks to know how to setup accounts for them quickly and manage relationships that have multiple accounts associated with them. It could be for M&A, it could be for things where there is just more handholding on the deposit side and we have a great back office that works on that. And then our frontline teams are very focused on who is rate sensitive and who is not and kind of migrating away from rate sensitive clients and migrating toward business relationships where there is really no expectation of yield, because they are operating accounts. And that’s – we believe that we can continue to grow in that area and meaningfully so and we are just, that’s where we have obviously been placing energy there for 2 years. And so we are reaping the benefits of that now. I think that our deposit flows can keep up with our loan growth. And so we are going to run around between 95% to 100% loan to deposit, could be a little above 100%, but I don’t see that right now, I actually see our deposit flows really supporting our loan growth. Loan growth on a net basis is not going to be astronomical just because of the runoff, but I think it’s going to be good enough for us to achieve our profitability objectives. And we are going to keep moving the needle there.

Okay, okay. And then lacking for me, I mean, the asset quality improvement has been really good. Obviously, your portfolio is a lower risk portfolio, especially in light of the growth in warehouse and the economic outlooks. Hopefully, we are going to be improving. I am just curious how you think about reserves and provisioning going forward? And I guess in light of the portfolio you have, what do you think is it more of a normalized reserve ratio for you?

Well, I will start and then let Lynn jump in. But I think we are kind of there now. I mean, I would I think we are at a pretty good coverage ratio. And yes like you, I mean, the skies looks sunny, the prospect of more stimulus. The economy seems to be holding up. All of those things have a positive outlook associated with them right now. And yes, there is some noise around taxes and some other things, but overall, I think the economy is – we have more positive outlook for the economy today than we have had in the last 6 months, especially with the stimulus prospects. So for that reason, I think provisioning will be appropriate, but it might not have been as heavy as people anticipated. And because we don’t have a big consumer portfolio outside of SFR, which is healthy, we don’t have the same volatility there as people – as some of the larger and other banks are experiencing. Lynn, what do you think about provision levels? We haven’t – we didn’t rehearse this, so she might give you a different answer or so.

No, I think probably more of the same there. I think, we are all talking about the fact that given these are unprecedented times that potentially the impact of the pandemic could be delayed. We don’t know that. So, don’t necessarily see large provision releases. Appreciate, there is a bit of that going on. So to the extent that there is modest loan growth, I think there is an opportunity for provision levels to, as Jared said, be appropriate, but probably not the levels we saw in 2020. And I think that we will have more clarity midway through the year.

Yes, I don’t know why we would – obviously, we follow a model. And we – there is, we plug it in and you toggle the economic forecast and you toggle all the things you are supposed to toggle based on your portfolio. But I think our team has done a good job of just being realistic and not too optimistic, not too pessimistic, just realistic. And the outputs have seemed right to me. And so this feels right for the environment that we are in. And I haven’t seen anything that suggests you to release this yet so.

Okay, alright. That’s helpful. Thanks, everybody.

Thanks, David.

The next question comes from Tim Coffey of Janney. Please go ahead.

Great. Thanks. Good morning, everybody.

Good morning.

Jared, when we look at say this movement on customer service fees and given the reports you are doing last 2 years is growing the deposit base and new accounts and new customers and the origination activity we are seeing on the loan side, would it be unreasonable to expect that that line item might increase from where you ended the 4Q at?

I missed the beginning of what you said. Tim, which line item were you referring to?

Customer service fees.

So, we have a – I am glad you brought that up. So we have an initiative that we launched at the end of last year. We have been working on for a while and it kind of kicked off end of last year, beginning of this year to really focus on – it’s a fee initiative. We did a huge survey of where do we stand relative to our peers to the extent you can get the data, where do we think we are low, where do we think we are high and how do we generate more fees. I think overall, on the customer service fees, it’s never going to be a massive driver for us fee income overall based on the way we are setup today, but I think Lynn and I both believe that we have some fruit to gather there and that we are going to be growing that line this year. We need to figure out a way to drive more fee income. And I think that’s going to have to come from other sources. And maybe there is an opportunity for a business line that will drive more fee income. And that’s something that I am looking at right now in terms of thinking about how could we do that without getting into detail there. But in terms of specifically customer service fees, we do have an initiative in place. Our team did a great job of calling the universe and figuring out where we needed to improve. And that’s been deployed, it was deployed. We rolled that out at the beginning of this year. So, we should start seeing the benefit of that.

In terms of like are you inverse to doing like an SBA business more so than you already are?

Not, other than I have been pretty clear on, how I feel about SBA I am not, so I think what you are asking is, would we do kind of a gain-on-sale business? Is that what you are saying?

Yes.

So I don’t see loans that we want to sell today given what we are trying to do with our balance sheet. And then in terms of SBA specifically, I am certainly open to it. We don’t have that engine running today enough to be able to do that, but I wouldn’t be opposed to it in the future. The one of the things, I think I have mentioned this before about SBA. In the past with the number of banks I have been associated with, with acquisitions, I have seen every bank claim that they do SBA differently and they are better at it than anybody else. And at the end of the day, it was all the same stuff. People make loans that they shouldn’t make, because they are supported by government guarantee and somehow they talked themselves into it. And then when the economy goes bad, you are left with a lot of big number of loans with an overall portfolio small dollar balance and it’s a really big pain to work it out, because you got to follow all the government rules. And I remember that. And so I have always been – and so the last thing you want to do is end up with the un-guaranteed portion. I mean, that’s like the worst of all scenarios. So, I think there are some banks that are probably doing a great job at it. I think it can be done. And I am certainly open to it. I mean, there is a couple of our peers and thanks to our community that are doing it well. But I don’t think we have the engine today to do it, right. And I think if you do – the right place to be an SBA today is on the real estate side and people get hurt more on the non-real estate SBA loans. And so that’s the engine that we are trying to build up. We are not there yet, but hopefully we can build it.

Okay. Alright. That’s great color. Thank you. And also circle back on the shared national credit. So last time I checked, you had 4 additional – 4 shared national credits pulled down plus some $50 million, excluding the one that you just got out of the bank this past quarter. Does that number still sound right?

Yes. Okay, I have my credit portfolio sheet I got to take a look, but other than the one, that sounds right, yes.

And is the strategy unchanged, where they are going to be kind of allowed to kind of resolve themselves?

Yes, we are not…

Okay.

We actually there was one that we were in that as I said, I am not looking to get into new ones, but there was one that we are in that had just performed so well and it was safe and it was good yield. And we just kind of re-upped it in terms of participating, because we are already in it, but we are not looking to gather any new ones. We obviously, on an exception basis if something made a lot of sense, we would do it, but for the most part, I just think they are not the way that we are going to grow the balance sheet overall. We are not going to go out and buy a whole bunch of them.

Yes, okay. That makes sense. Alright, those are my questions. I appreciate the time. Thank you.

Thank you so much. Yes, of course.

Thank you.

The next question comes from Jacque Bohlen of KBW. Please go ahead.

Hi, good morning.

Good morning, Jacque.

I just wanted to touch on the balance sheet a little bit. I know we have discussed it quite a bit, but just thinking about weighing its size versus its profitability and thinking about it in the context of very recent stimulus and then the potential for new how these discussions – what were the discussions that you are having, I guess on the potential for further inflows from that stimulus but managing the size of the balance sheet so that you are able to protect us profitability?

So, starting with PPP, I mean, it didn’t – it wasn’t huge for us. We did $270 million the first time, right. And so relative to our balance sheet, it just didn’t do much. It didn’t mean a lot to us from a liquidity standpoint. We were there to primarily serve our clients. We did about 75% existing clients and about 25% new relationships and for the second round, we are obviously reaching back out to all of our clients seeing who needs help, be there for the first time or the second time and then we are going reaching out to all the ones that we talk to that maybe didn’t do it for us and seeing if we could help them. So I think we are going to see a similar size program this time around, it’s not going to be something maybe a little, we have some technology that we deployed this time that is helping us and it’s making it a little bit smoother. So, I think we would have the capacity to do a lot more. But I also think the market demand is a lot lower. I mean, we are seeing – we are not seeing the same amount of demand as we did the first time around. And the in-calls are modest and we are doing a lot of outbound calling, whereas last time, it was just the phones are ringing off the hook and we were trying to prioritize our clients and give them a great experience in the process. So, Lynn, do you see it differently?

With respect to PPP, no, I think that’s what we are seeing.

Yes, Jacque, was that the focus of your question or were you speaking about things outside of that?

It’s – I think it was part of it. It’s partly PPP and then other maybe deposit inflows that you maybe getting because of stimulus and I realized that to the extent that those are coming in. It’s also enabling you to reduce other higher cost pieces of spending?

That’s exactly right. To the extent that those deposits are, we think that they are sticky and they are the right relationship deposits. It’s allowing us to offload much sooner other deposits that we might have modestly been moving out. So, it affects the rate at which we re-price our CDs for example, right. We are moving down our CDs at a pretty good clip, especially our expensive ones. And we are happy to have anybody who is a taker at the prices we want to offer. But we are – there is a science to how quickly do you drop those rates on the ones that just matured, because how much do you want to let go. And we can accelerate that and drop our deposit costs faster to the extent that we are having a lot of success on kind of origination of relationship deposits whether they come because of stimulus or not. I think we will see a buildup of liquidity because of the stimulus. You got to be careful, because it can flow out and then you relied on it. So, we got to look at that, but we don’t know what it’s going to look like yet. Right now, it just seems like the economy is just flush of liquidity. I was reading about how savings rates, savings accounts really haven’t gone down and households are really holding on to their savings.

Yes. I would just – I would add, Jacque, kind of to your point, there is a lot of liquidity in the market right now. I think what we observed over the fourth quarter was maybe reaching some level of equilibrium meaning that I think there was more clarity on what part was viewed as temporary and what was going to be staying around. So, I think there was an opportunity to improve our earning asset mix by lowering the levels of say excess liquidity and that benefited the margin. I think as we turned into 2021, the PPP program has reinitiated. The forgiveness is also coming through. I think that helps with liquidity flows, but I do think we are seeing elevated levels of liquidity again. And as we have talked about I think in length here looking to deploy them into earning assets, but to the extent that, that’s moderated. I think we might see a little bit of additional liquidity on balance sheets in the first quarter.

Alright, great. Thank you both very much for the color.

Thanks, Jacque.

The next question comes from Steve Moss of B. Riley Securities. Please go ahead.

Good morning.

Good morning, Steve.

Good morning.

Good morning, Jared, Lynn. So, most of my questions were asked and answered here. I guess just one little thing here in terms of the HOA deposit business, specialty deposits you guys are getting into kind of how big do you see that business growing here going forward?

I am hesitant to make a prediction about it. We have kind of our own internal models of what we are looking for, but it’s part of our overall expected deposit growth for the year. I mean, I don’t – I think our goals are to continue to move non-interest bearing to – you got to get it to 30% before we get it to 35% moving it as fast as we did over the year. I was pretty pleased with that. But I think we are going make progress this year in driving non-interest bearing closer to 30%. It’s hard to do when you are growing the denominator as well, but we are going to keep moving it down the field and it’s part of that number.

I would just add and I think it equally is important as just literally the diversification within the deposit business itself you are talking.

Got it. Alright. Well, thank you very much. Good to see your margin expansion here this quarter.

Okay, thanks.

Thank you.

This concludes our question-and-answer session. Ladies and gentlemen, this does also conclude today’s teleconference. You may disconnect your lines at this time and thank you for your participation.